South Africa’s macro conditions have improved, with easing inflation and interest rates offering some relief to household budgets. Yet retail trading updates suggest spending remains constrained. Volumes are weak, discretionary demand is fragile – and rising oil prices add renewed pressure. We therefore remain cautious on the sector, with a preference for more defensive segments.
On paper, South Africa’s macro backdrop should be supportive for consumers and, ultimately, retailers. Inflation has moderated, interest rates have begun to ease, the rand has strengthened at points, precious metal prices remain supportive, and gross domestic product (GDP) growth is improving off a low base.
However, recent retail results and trading updates point to a more muted reality – recent support to household spending has not been sufficient to place discretionary demand on a sustained upward path. The benefit from lower inflation is fading, while above-inflation wage increases appear to have been temporary rather than structural.
Across the sector, consumers remain under pressure. Demand is uneven, volumes are weak, and promotional intensity remains high. In discretionary retail, the expected uplift has yet to materialise in a meaningful way.
More fundamentally, this reflects the nature of the recovery. After several years of rising living costs, any improvement is likely to be gradual. Early gains tend to stabilise household finances rather than drive a step change in discretionary spending.
A temporary lift in consumption
Statistics on household consumption expenditure (HCE) growth, a useful proxy for discretionary demand, suggest that recent strength was driven by a temporary liquidity boost from two-pot withdrawals rather than an improvement in underlying consumer health. Adjusting for this effect, growth would likely have been close to flat.
Festive trading updates, particularly in clothing retail, point to a similar dynamic. Headline growth has been supported by promotions and base effects, while underlying demand remains subdued.
With this temporary support now normalised, a more durable recovery will require stronger GDP growth, alongside improvements in income and employment.
Oil prices: another headwind
The recent rise in oil prices introduces a fresh headwind. Fuel costs feed directly into household budgets and indirectly into broader input costs, increasing the risk of renewed inflation.
This reduces disposable income just as conditions were beginning to improve, and reinforces a difficult trading environment for retailers. Value-seeking behaviour is likely to persist, with continued pressure on pricing and margins.
Food retail more resilient
Food retailers are better positioned in this environment. They are typically able to pass through cost pressures and benefit from operating leverage, while the sector has also experienced disinflation, and in some cases, deflation, in key staples such as maize.
Food remains a priority spend. As a result, food retail is likely to prove more resilient than discretionary categories, particularly where retailers have scale, strong value positioning and consistent execution.
Portfolio positioning
We continue to favour retail businesses with structural moats – competitive advantages – that can defend earnings in a challenging operating environment. Our stance remains defensive, with a preference for quality businesses in food and pharma.
Within clothing retail, we remain selective, with exposure to Pepkor. A more constructive view on higher-beta discretionary names would require clearer evidence of demand-led, rather than promotion-led, momentum.
While macro conditions are improving, the transmission into spending remains slow. With temporary support fading and new pressures emerging, the recovery in retail demand is likely to remain uneven over the medium term.
